A beacon for innovators

By DAVID HO in Hong Kong

Monday, May 15, 2017, 19:07By DAVID HO in Hong Kong

Home to tech giants Huawei, ZTE and Tencent, Shenzhen justifies its reputation as the ‘Silicon Valley of hardware’

A woman uses the payment service of WeChat on her smartphone to buy a bottled drink at a vending machine in Beijing. WeChat, the messenger app by Shenzhen-based tech giant Tencent, allows users to buy things, pay bills and top up mobile game credits. (IMAGINECHINA)

Private companies in the southern Chinese industrial heartland of Shenzhen have moved well beyond their roots as simple hardware manufacturers to emerge as powerful global innovators.

Technology and telecommunications giants like Huawei, ZTE and Tencent have all come from Shenzhen, and are now powering the development of a whole ecosystem of tech companies. These include not only domestic startups, but also multinationals looking to leverage their strengths.

Even international companies like HAX, a San Francisco-based hardware startup accelerator, have set up in Shenzhen. As general partner Benjamin Joffe declares in a video on the firm’s website about Shenzhen: “It’s the Silicon Valley of hardware.”

This ecosystem in Shenzhen has helped Chinese companies make their mark as global innovators.

The two companies heading last year’s World Intellectual Property Organization (WIPO) list for patent applications are based in Shenzhen. These are ZTE with 4,123 applications and Huawei with 3,692.

“China-based filers are behind much of the growth in international patent and trademark filings, making great strides in internationalizing their businesses as the country continues its journey from Made in China to Created in China,” said Francis Gurry, director general of the WIPO.

China may not have Google, Facebook, Twitter, YouTube or Amazon, but it does have its own successful online services companies such as Baidu, RenRen, Weibo, WeChat and Taobao. And most of these firms began in Shenzhen.

But these are not simply copycats of their international counterparts. While they do serve the same primary functions, they come loaded with innovations that are making global companies sit up and take notice.

The biggest success story is likely WeChat, the messenger app by Shenzhen-based tech giant Tencent. The app currently has 889 million monthly active users, more than 10 million official accounts and 200,000 third-party developers.

When Facebook bought messenger service WhatsApp for a whopping US$19 billion in 2014, investment firm CLSA valued WeChat at more than three times WhatsApp’s selling price. They estimated the Chinese competitor’s worth to be “at least US$60 billion”.

In a note published shortly after the WhatsApp purchase, CLSA analysts said that although WeChat lags behind WhatsApp in user-based numbers, WeChat contains more active revenue streams that make it a more valuable investment.

They estimated that WhatsApp only generates around US$1 per download. In contrast, it said WeChat could generate around US$142 per user from “mobile games, advertising, e-commerce, O2O (online-to-offline commerce), mobile payment and Internet financing”.

The report also noted some favorable market conditions for WeChat given that Asia leads the global mobile game market and China’s poor infrastructure makes “e-commerce, online-to-offline payments and mobile payment” a bankable opportunity.

WeChat has indeed played to the needs of its uniquely Asian market with tailored cultural offerings, such as the WeChat red envelope function.

Based on the Chinese tradition of giving red packets filled with money during festive occasions, Tencent offers users the chance to send up to 200 yuan (US$29) in virtual credit through the app.

Launched in 2014, the app counted 20 million transactions via the red packet function in the first two days of the lunar new year. The following year, the number grew to 3.2 billion.

In 2016, WeChat recorded 32.1 billion red packets sent in the period from Feb 7 to 12 during the Chinese new year festival alone.

The red packets also feed into WeChat’s other functions. Recipients can use the credit for a range of payments, such as movies, paying off bills and topping up mobile game credits.

The streamlining of consumer data in WeChat is a marketing dream come true, given that similar data is very fragmented in other parts of the world.

The evolution of WeChat and its parent Tencent has tracked the evolution of its home base, Shenzhen, and its emergence as a tech hub that rivals California’s Silicon Valley.

Shenzhen is slowly shaking off its reliance on manufacturing. The city’s mayor recently announced that more than 17,000 manufacturers have closed down in the past five years due to the authorities’ industry upgrade plans.

And as it cultivates its own culture of creation and innovation, it is taking steps to shift from a Made in China mentality to Made by China.

Expected to be a significant contributor is the emergence of maker spaces — creative community workspaces with the tools to encourage learning, invention and innovation.

As David Li, one of the founders of China’s first maker space XinCheJian, famously declared: “In the old days, if you wanted to be innovative, if you wanted to have the latest technology, you would go to Silicon Valley for electronics. But today, it’s Shenzhen.”

He made the bold statement a couple of years ago, but it is increasingly true today.

With a population of 1.4 billion, China has an online presence that is already enormous and likely to grow even larger.

Shenzhen maintained its position at 22 in the latest Global Financial Centres Index, released in March by the British think tank Z/Yen Group.

The ranking is an aggregate of indices from five key areas: Business environment, financial sector development, infrastructure factors, human capital, and reputation and general factors.

Boasting a workforce with an average age of only 28, Shenzhen ranked at 12 in the key area of human capital.

IT, biotechnology, new energy, new materials, telecommunications and the creative industry are the six key industries that form 40 percent of the city’s economy, contributing a combined 780 billion yuan.

As of February 2016, 70 percent of the 295 listed companies on the Shenzhen Stock Exchange consisted of manufacturing companies, followed by tech groups.

Unlike other parts of China, however, Shenzhen has been steering its economy toward research and development (R&D) in a bid to transform into an innovation hub.

Since 2013, it has invested 4 percent of its annual GDP, more than 80 billion yuan, in R&D. Not only is this is the highest ratio among Chinese cities, it also puts it on par with South Korea and Israel.

In comparison, Singapore and Hong Kong invested 2.1 percent and 0.7 percent, respectively, of their annual GDP in R&D.

Chua Han Teng, an analyst with BMI Research, believes this will give Shenzhen the edge to remain an important driver of growth for the Chinese economy.

“The first tier city (Shenzhen) will lead China’s innovation growth over the coming years.”

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